CHECKING ACCOUNTS

Overview

There’s a very old joke about a guy who couldn’t believe his checking account was overdrawn, because he still had checks. It’s no joke, though, if you don’t have enough money in your account to cover the checks you’ve written.

A checking account may be your first lesson in accounting, because you learn:

• That your deposits need to be more than your withdrawals
• How important it is to balance your books

A recent survey found that almost 20 percent of Americans don’t balance their checkbooks. This is a terrible mistake to make.

Why They're Important?

Aside from being a lesson in accounting, checking accounts teach you the basic principles of investing. Here are some other reasons why checking accounts are so important:

• You have a convenient way to pay your bills.
• You are able to monitor your expenses and spending habits.
• You develop a relationship with a financial institution.
• You can use the account as a springboard to other investments, such as by arranging an electronic transfer from your checking account to a mutual fund.
• You build a track record that demonstrates your ability to handle money.

Impact on Credit Rating

The simple checking account can complicate your life if you don’t pay attention. Your credit rating is based in part on how well you’ve handled your checking account. All of the following may be reported:

• Bounced checks (checks returned because there are insufficient funds in your account to cover them)
• Late bill payments
• Missed bill payments

In addition, you’ll have big problems with your landlord or car insurer if you bounce a check or make late payments. Aside from the damage done to your credit rating, passing bad checks can cause you legal problems.

Tips & Common Mistakes

Common mistake: Keeping large amounts of money in your checking account

You won’t be living large on your checking account interest. Many checking accounts pay little or no interest. That’s why it usually doesn’t make sense to keep large amounts of money in your checking account. It’s money you could be investing to make a higher rate of return.

Common mistake: Not waiting for checks to clear

One of the biggest mistakes you can make with a checking account is thinking that you have access to deposits immediately. If you deposit a check, especially one drawn on an out-of-town bank, it may be several days until your funds are available. You must wait for the deposited check to clear, which means that you don’t get access to your money until the bank gets its money. Also, sometimes your bank may put a “hold” on a deposited check. Until the hold is removed, you can’t write checks on the deposited amount.

Common mistake: Relying on overdraft protection

Overdraft protection may sound like a great feature but it’s dangerous. Although you’re protected if you bounce a check, the financial institution charges you interest on the money it shells out on your behalf. Overdraft protection encourages you to overspend. You are far better off staying on top of your finances by balancing your checkbook.

Tip: Understand the fees and charges for your checking account

If you read the small print on the paperwork that comes with your checking account statement, you’ll see that fees and service charges can make a big dent in your balance. Here are a few common ones:

• ATM transaction fees
• Charges to order more checks
• Bounced check fees
• Stop payment orders
• Maintenance fees for falling below the minimum balance requirement

Getting Started

A good way to get started is to look at the banks in your neighborhood to see if they offer a checking account that meets your needs. Quite often, convenience is much more important than a few cents more in interest, especially if you can walk to the bank. Your life may also be a little easier if your checking account is at a bank where everybody knows your name.

You can also open an account online and monitor your finances regularly. Before opening any account, though, make sure you understand all of the terms and conditions.

Online banking

The ability to bank online is appealing for a number of reasons:

• It is convenient and you can do your banking in your pajamas.
• Once you establish an account, you’ll save time, effort and gas.
• You can arrange for some of your monthly bills to be paid automatically.

There are drawbacks, however. If you type in a wrong number when paying a bill online, you can wreak havoc with your account. In addition, you may have concerns about Internet privacy and security. Although you don’t receive copies of checks for your records, you do get documentation to show a bill was paid. Ask the financial institution what security measures are in place to protect your privacy and your account.

FAQs

What checking account features are the most important?

A feature that’s right for you may not be right for your roommate. Depending on your needs, the following features may be important to you:

• Low minimum balance requirement
• Free checks
• Debit card so you can buy items without writing a check
• ATM or bank card which allows you to withdraw cash at ATMs.
• A competitive interest rate

Remember that unlike a credit card, a debit card removes money from your checking account right away. You should faithfully record all debit card transactions and ATM withdrawals in your checkbook.

If you only expect to keep about $100 in your account most of the time, the interest rate isn’t going to matter much. You might be more concerned about whether the bank is open on a Saturday or where its ATM machines are located. Make sure your account is insured if the financial institution becomes insolvent.

How do I find the best deal on a checking account?

As you’ll see with so many investments, the first step is shopping around for the best deal. Many financial institutions offer checking account promotions to get you in the door. Their goal is to entice you to start a relationship, so you’ll come to them later for other services like loans or a mortgage. You might be offered free checks or merchandise to induce you to bank with that institution.

Many banks offer free checking. You pay no monthly maintenance fee or penalties, unless your balance falls below a specific amount. Watch out, though, for other fees like an exorbitant charge for checks, even the drab ones.

How do I balance my checkbook?

There are four simple steps to take to balance your checkbook:

1. As you go through your statement, put a checkmark next to all deposits, ATM withdrawals, and debit card transactions in your checkbook register.
2. Take the ending balance on your statement and add any deposits or credits that occurred after the statement was issued.
3. Subtract any checks that haven’t cleared and debits that don’t appear on your statement.
4. The balance should match the amount you have listed in your checkbook. If it doesn’t, look for math errors or transactions you may have overlooked.